Page 87 - Acertaining Economic Damages Calculation

Cede & Co. v. Technicolor, Inc., 2003 WL 23700218 (Del. Ch. Dec. 31, 2003) (unpublished), aff’d in part,
rev’d in part, Cede & Co. v. Technicolor, Inc., 884 A.2d 26 (Del. 2005) fn 32

The case of Cede & Co. v. Technicolor, Inc. in the Delaware Chancery Court, involved the appraisal of
201,200 shares of Respondent Technicolor, Inc. owned by petitioner Cinerama, Inc.

Both experts used a discounted cash flow (DCF) framework but took different approaches in developing
their respective valuation conclusions. Petitioner’s expert used regression analysis and replaced man-
agement’s forecasts. The Chancery Court pointed out that a statistical technique was viewed very differ-
ently than a valuation technique, stating that almost all the cases Petitioner cited used regression anal-
yses only to demonstrate a connection between the dependent and independent variables (a statistical
technique), not to forecast costs, revenues, or profits (a valuation technique).

In order for regression analysis to be an appropriate tool for forecasting economic relationships,
the analysis must be based on a mature business with stable economic relationships. There also
should be a significant relationship between the dependent and independent variables throughout
the historical period from which the regression was derived and would be reasonably expected to
continue throughout the forecast period.

Regarding the dangers of using regression analysis to forecast, it has been written by scholars of
regression analysis that: It is not advisable to use an estimated regression relationship for extrap-
olation. That is, the estimated model should not be used to make inferences on values of the de-
pendent variable beyond the range of observed x-values... [A]lthough the model may fit the ex-
isting data quite well, there may be no evidence that the model would be appropriate outside the
range of that data. fn 33

Major issues led the court to conclude that one of the entities was not necessarily the type of business
with stable economic relationships sufficient to support a forecast based on regression analyses, espe-
cially given the reluctance among scholars to use regressions for forecasting. Therefore, the court reject-
ed this analysis and used its own methodology in order to reach a conclusion.

Best Evidence and the Use of Proprietary Information

Damages experts, especially those with specific industry experience, may be retained because of the
knowledge, information, and expertise that they have developed, including experience related to the sub-
ject industry. This information may include what is deemed to be proprietary data, financial models, and
methodologies that the expert considers to be trade secrets, which can create challenges for a court in de-
termining whether the reasonable certainty standard has been met by the expert. The following case ad-
dresses the testimony of an expert who relied upon proprietary methodologies in reaching his opinions.

fn 32 Although this case involves the appraisal of a closely held business, rather than a damages analysis, this case has been included
given concerns expressed by the court with respect to the economic stability of the subject company that may have some relevance to
a claim for damages.

fn 33 Cede & Co., 2003 WL 23700218, at *9.

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